Marketing Chapter 11
unfair sales acts
(unfair trade practices acts) state laws that prohibit suppliers from selling products below cost to protect small businesses from larger competitors
steps of price planning
1. develop pricing objectives; 2. estimate demand; 3. determine costs; 4. evaluate the pricing environment; 5. choose a pricing strategy; 6. develop pricing tactics
external influences on pricing
1. the economy [recessions, inflation]; 2. the competition; 3. consumer trends [bargain hunting]
upward shift in demand
: at any given price, demand is greater than before the shift occurs
freenomics
A business model that encourages giving products away for free because of the increase in profits that can be achieved by getting more people to participate in a market (externalities). Ex. Google/Gmail is free because it attracts more "eyeballs," which boosts the rates advertisers are willing to pay to talk to those people, paying Google
profit objectives
a certain level of profit a firm hopes to realize; focus is on a target level of profit growth or a desired net profit margin; important to firms that believe profit is what motivates shareholders and bankers to invest in a company
pricing for multiple products
a firm may sell several products that consumers typically buy at one time (ex. Taco Bell - buy a taco, also a soft drink + burrito)
break-even analysis
a method for determining the number of units that a firm must produce and sell at a given price to cover all its costs
marginal analysis
a method that uses cost and demand to identify the price that will maximize profits
yield management pricing
a practice of charging different prices to different customers in order to manage capacity while maximizing revenues. (Ex. Airlines, hotels, cruise lines, etc.). Service firms! Goal is to accurately predict proportion of customers who fall into each category and allocate percentages of the airline's or hotel's capacity accordingly so that no product goes unsold
reserve price
a price below which the item will not be sold
reasonable price
a price that makes the product affordable and appears to be fair - often the most important consideration in a purchase
pricing strategies based on demand
a price-setting method based on estimates of demand at different prices. Firms must determine how much product they can sell in each market and at what price. May use a field experiment where product is offered at different prices in different markets and reactions are gauged
penetration pricing
a pricing strategy in which a firm introduces a new product at a very low price to encourage more customers to purchase it. May act as barrier-to-entry for competitors if the prices the market will bear are so low that the company will not be able to recover development and manufacturing costs
value pricing/everyday low pricing [EDLP]
a pricing strategy in which a firm sets prices that provide ultimate value to customers. In the customers' eyes, the price is justified by what they receive. Ex. Wal-Mart demands tens of billions of dollars in cost efficiencies from retail supply chain and passes these savings on to customers. Begins with customers, considers competition, then determines best pricing strategy
price leadership strategy
a pricing strategy in which one firm first sets its price and other firms in the industry follow with the same or very similar prices (usually in oligopoly). Maximizes price competition. Popular because firms agree on prices legally without coordinating rates with each other; in most cases this would be illegal a.k.a. collusion
dynamic pricing
a pricing strategy in which the price can easily be adjusted to meet changes in the marketplace. A bricks-and-mortar retail store has difficulty changing prices, because they have to reticket/update computer information on everything. A B2B company similarly has to send out new catalogues, etc. -- these companies don't change prices often. Online, you can change more quickly because the price to do so is practically zero
captive pricing
a pricing tactic for 2 items that must be used together; one item is priced very low, and the firm makes its profit on another, high-margin item essential to the operation of the first item. Ex. Shaving products - razor is cheap, blades are expensive
uniform delivered pricing
a pricing tactic in which a firm adds a standard shipping charge to the price for all customers regardless of location
basing-point pricing
a pricing tactic in which customers pay shipping charges from set basing-point locations, whether the goods are actually shipped from these points or not
FOB delivered pricing
a pricing tactic in which the cost of loading and transporting the product to the customer is included in the selling price and is paid by the manufacturer
FOB origin pricing
a pricing tactic in which the cost of transporting the product from the factory to the customer's location is the responsibility of the customer
freight absorption pricing
a pricing tactic in which the seller absorbs the total cost of transportation. Usually done for high-ticket items, where the cost of shipping is a negligible part of the sales price and profit margin
quantity discounts
a pricing tactic of charging reduced prices for purchases of larger quantities of a product
target costing
a process in which firms identify the quality and functionality needed to satisfy customers and what price they are willing to pay before the product is designed; the product is manufactured only if the firm can control costs to meet the required price
internal references prices
a set price or a price range in consumers' minds that they refer to in evaluating a product's price -- based on past experience
skimming price
a very high, premium price that a firm charges for its new, highly desirable product. Intention of reducing price in the future in response to market pressures. More likely to succeed if product provides some important benefits to target market that make customers feel they must have it no matter what the cost. Should be little chance that competitors can get into the market quickly
open auction
all the buyers know the highest price bid at any point in time
bait-and-switch
an illegal marketing practice in which an advertised price special is used as bait to get customers into the store with the intention of switching them to a higher-priced item. (ex. Budget model appliance like a washing machine that has been stripped of all but the most basic features, but it's almost impossible to buy this advertised item. The salespeople try to get customers to buy a different, more expensive, item by telling the consumers that the advertised item is poor quality, lacking features, etc.). Hard to detect because it's too similar to "trading up."
cumulative quantity discounts
based on a total quantity bought within a specified time period, often a year, and encourage a buyer to stick with a single seller instead of moving from one supplier to another. Rebates (firm sends buyer a rebate check at the end of the discount period or gives buyer credit against future orders)
noncumulative quantity discounts
based only on the quantity purchased with each individual order and encourage larger single orders but do little to tie the buyer and the seller together
horizontal price fixing
competitors making the same product jointly determine what price they each will charge. There must be an exchange of pricing information between sellers to be illegal, otherwise it could just be competitive [Sherman Antitrust Act]
pricing strategies based on consumers' needs
concerned with keeping customers for the long term
psychological issues in setting prices
consumers aren't rational
buyers' pricing expectations
consumers base perceptions of price on what they consider to be "fair." When a price of a product is above or sometimes even below what consumers expect, they are less willing to purchase the product. If above, they may think it's a rip-off. If below, they may think quality is below par. Marketers need to understand the pricing expectations of their customers
price-quality inferences
consumers use price as a cue or indicator of quality (we believe something to be true without any direct evidence); if consumers are unable to judge the quality of a product through examination or prior experience, they usually assume that the higher-priced product is the higher-quality product
image enhancement objectives
consumers use price to make inferences about the quality of a product
variable costs
costs of production (raw and processed materials, parts, and labor) that are tied to and vary depending on the number of units produced. Usually go down with higher levels of production - company is offered deals to buy more parts to create their product
fixed costs
costs of production that do not change with the number of units produced
elastic demand
demand in which changes in price have large effects on the amount demanded. Greater than 1 in the equation
inelastic demand
demand in which changes in price have little or no effect on the amount demanded. Less than 1 in the equation
trade or functional discounts
discounts off list price of products to members of the channel of distribution who perform various marketing functions
online auctions
e-commerce that allows shoppers to purchase products through online bidding
distribution-based pricing
establishes how firms handle the cost of shipping products to customers near, far, and wide. Decision to charge all customers the same price or to vary according to shipping cost
monopolistic competition
ex. Restaurant industry; a lot of sellers each offering a slightly different product; firms can differentiate products and focus on nonprice competition; each firm prices its product on basis of cost without much concern for matching exact price of competitors' products
purely competitive
ex. Wheat farmers; little opportunity to raise or lower prices; price of wheat, soybeans, etc. is directly influenced by supply and demand. Less crops, price goes up; more people eat fish instead of red meat, price goes up
downward shift in demand
ex. meat recall
oligopoly
few sellers, many buyers; status quo pricing objectives (pricing of all competitors is similar); allows all players in industry to remain profitable. Ex. Delta Airlines
cash discounts
firms try to entice their customers to pay their bills quickly by offering cash discounts (2% 10 days, net 30 days)
customer satisfaction objectives
focus on keeping customers for the long term; customer satisfaction and long-term service
free enterprise system
founded on the idea that the marketplace will regulate itself; prices will rise or fall according to demand. Firms and individuals will supply goods and services at fair prices if there is an adequate profit incentive. This is not all true, so there is legislation to protect consumers and businesses from predatory rivals
demand curve
graph that illustrates effect of price on quantity demanded of a product; shows quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same
prestige/luxury products
have a high price and appeal to status-conscious consumers
shifts in demand
if a factor other than price changes, so can demand (ex. Seeing a celebrity using the product, demand goes up)
substitute goods/services
if a product has a close substitute, its demand will be elastic; marketers here are less likely to compete on price
law of demand
if price of a product goes up, the number of units that customers are willing to buy goes down; if prices decrease, customers will buy more; "price-quantity relationship." Exception = prestige products, until even those prices get too high and almost no one can afford them
assimilation effect
if prices and other characteristics of two products are fairly close, the consumer will probably feel that the product quality is similar
contrast effect
if the prices of the two products are too far apart; the customer equates the gap with a big difference in quality (ex. Lower priced one isn't as good as the higher priced one, so buy the higher priced one)
predatory pricing
illegal pricing strategy in which a company sets a very low price for the purpose of driving competitors out of business. Later, when they have a monopoly, they turn around and increase prices. [Sherman Act and Robinson-Patman Act]
payment pricing
makes the consumer think the price is "do-able" by breaking up the total price into smaller amounts payable over time (ex. Lease rather than buy a car). Designed to reduce: • Negative reaction to total retail price = sticker shock
profit is maximized when...
marginal cost is exactly equal to marginal revenue; the cost of producing one unit is exactly equal to the revenue to be realized from selling that one unit
odd-even pricing
marketers assume that there is a psychological response to odd prices that differs from the response to even prices (ex. $1.99 vs. $2.00). Prices ending in 99 rather than 00 for some reason lead to increased sales
sales/market share objectives
maximize sales (in dollars or units) or increase market share
cost-plus pricing
method of setting prices in which the seller totals all the costs for the product and then adds an amount to arrive at the selling price; most common cost-based approach to pricing a product. Marketers calculate markup on cost or markup on selling price to calculate cost-plus pricing
break-even price
minimum price necessary to cover all costs
fad products
must price on profit objectives; short market life - profit objective is essential to allow the firm to recover its investment in a short time
CIF [cost, insurance, freight]
ocean shipments; seller quotes price for goods (including insurance), transportation, and miscellaneous charges to the point of debarkation from the vessel
prestige pricing
people buy more as the price goes up; luxury goods; we value a product or service more when the price increases
price-placebo effect
people who think they're getting the real (more expensive) product but who are actually using a product that's the same as the less expensive product experience the better effects of using the "real" one. ($90 wine and $10 wine that's the same in different bottles - people liked the $90 better)
seasonal discounts
price reductions offered only during certain times of the year (snow blowers, lawn mowers, etc.). Marketers try to entice customers to buy off-season and store the product at their locations until the right time of the year or pass along the discount to consumers with off-season sales programs. Also may offer discounts in-season to create competitive advantage during periods of high demand
trial pricing
pricing a new product low for a limited period of time in order to lower the risk for a customer. Increases trial price after the introductory period. Customer acceptance first, make profits later
pricing strategies based on competition
pricing wares near, at, above, or below the competition's prices
new-product pricing
product is new to market, there is no established industry price norm
CFR [cost and freight]
quoted price covers goods and cost of transportation to the named point of debarkation but the buyer must pay the cost of insurance. Also ocean shipments
Robinson-Patman act
regulations against price discrimination in interstate commerce. Prevent firms from selling the same product to different retailers and wholesalers at different prices if such practices lessen competition. Prohibits offering "extras" such as discounts, rebates, premiums, coupons, guarantees, and free delivery to some but not all customers
two-part pricing
requires 2 separate types of payments to purchase the product (ex. Golf club charges yearly or monthly fee + fees for each round of golf)
CIP [carriage and insurance paid to] and CPT [carriage paid to]
same provisions as CIF and CFR but used for shipment by modes other than water
price bundling
selling 2+ goods or services as a single package for one price. Often costs less than the total price of the items if bought individually (but consumers buy more, so the firm still earns revenue)
pricing strategies based on cost
simple, relatively risk-free; price at least covers cost to manufacture/market; drawbacks: don't consider factors like nature of target market, demand, competition, product life cycle, and product image; often a marketer's best choice even with difficulties of calculating accurate cost
price
the assignment of value, or the amount the consumer must exchange to receive the offering
price fixing
the collaboration of two or more firms in setting prices, usually to keep prices high
contribution per unit
the difference between the price the firm charges for a product and the variable costs
average fixed costs
the fixed cost per unit produced
marginal cost
the increase in total cost that results from producing one additional unit of a product
marginal revenue
the increase in total income or revenue that results from selling one additional unit of a product
price elasticity of demand
the percentage change in unit sales that results from a percentage change in price; percentage change in quantity demanded [divided by] Percentage change in price
break-even point
the point at which the total revenue and total costs are equal and beyond which the company makes a profit; below that point, the firm will suffer a loss
price lining
the practice of setting a limited number of different specific prices, called price points, for items in a product line. Good way to maximize profits - in theory a firm would charge each customer the highest price they'd be willing to pay, but offering each consumer a different price is not really possible, so they create a limited number of prices that generally fall at the top of the different prices ranges customers find acceptable
list price
the price the end customer is expected to pay as determined by the manufacturer; also referred to as the suggested retail price
competitive effect objectives
the pricing plan is intended to have a certain effect on the competition's marketing efforts; sometimes a firm may try to preempt or reduce effectiveness of competitor(s)
loss leader pricing
the pricing policy of setting prices very low or even below cost to attract customers into a store (hoping to build store traffic and that consumers will buy other items at regular prices)
vertical price fixing
the retailer that wants to carry the product has to charge the "suggested" retail price; manufacturers or wholesalers attempt to force retailer to charge a certain price for their product. Today, retailers don't need to do this. [Consumer Goods Pricing Act of 1976]
total costs
the total of the fixed costs and the variable costs for a set number of units produced
opportunity cost
the value of something we give up to obtain something else (ex. College education - you give up working/earning money to go to class)
reverse auction
tool used by firms to manage their costs in business-to-business buying. Sellers compete for the right to provide a product at, hopefully, a low price
cross-elasticity of demand
when changes in the price of one product affect the demand for another item. Ex. If price of bananas goes up, people may instead buy strawberries or blueberries. When products are complements - one is essential to the use of another - increase in price of one decreases the demand for the second. Ex. Price of gas goes up, people may drive less - demand for tires and gas decreases